Two weeks ago, NPQcovered an excellent report written by the Century Foundation’s Robert Shireman about for-profit universities that convert to nonprofits. The report detailed a web of interrelationships and self-dealing only very thinly veiled. In the report, Shireman writes that beyond the initial granting of tax-exempt status, the IRS is unlikely to police these organizations even if their violations are relatively flagrant—and if the IRS doesn’t act, then the Department of Education is not likely to. He calls this a “regulatory blind spot.”

These sham nonprofits make a mockery of traditional nonprofit governing and accountability structures with incestuous leadership arrangements, troubling debt structures, while continuing to make hefty profits for those in charge with questionable results for students. As the agencies responsible for granting nonprofit, tax exempt status and protecting students, the [IRS] and [Education Department] must work together to better assess these conversions based on the priorities and authority of both agencies.

They went on to write:

The report enumerates ways in which four institutions—Herzing University, Remington College, Inc., Everglades College, and the Center for Excellence in Higher Education (CEHE)—have converted to non-profit educational organizations without any substantial changes in their operations and in ways inconsistent with what the organizations declared when seeking tax exempt non-profit status. In each of these cases, the companies that owned and operated for-profit college campuses and online programs appear to have sold the for-profit entity’s assets to a non-profit entity controlled by the same individuals who had controlled the for-profit institution. Questions exist regarding how the asset purchases were structured and whether loan payments made to the non-profit entity by the for-profit entity to finance the asset purchase are a form of de facto profit to the former directors and executives that would not otherwise be allowable.

Other concerns include: 1) schools operating board of directors hand-picked by former owners and filled with trustees with conflicts-of-interest or who are profiting directly and indirectly from the new non-profit institution; 2) paying rent for the use of facilities retained by the same individuals who previously owned the for-profit schools housed there; and 3) former owners of the for-profit schools collecting money from the new non-profits for ancillary services like hotel fees and private jets on top of receiving an inflated salary. Given these concerns, we encourage you to review the cases highlighted in the report to ensure these entities comply with the law and the requirements for tax-exempt status under section 501(c)(3) of the Internal Revenue Code.

Ruth is Editor in Chief of the Nonprofit Quarterly. Her background includes forty-five years of experience in nonprofits, primarily in organizations that mix grassroots community work with policy change. Beginning in the mid-1980s, Ruth spent a decade at the Boston Foundation, developing and implementing capacity building programs and advocating for grantmaking attention to constituent involvement.

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A report from the Century Foundation recommends immediate regulatory action be taken in the face of faux conversions of for-profit colleges to nonprofit status. Unfortunately, changes in status did not mean improvements to integrity.